Adams Manufacturing allocates overhead to production on the basis of direct labor costs. At the beginning of the year, Adams estimated total overhead of $363,800; materials of $404,000 and direct labor of $214,000. During the year Adams Incurred $386,400 in materials costs, $382 200 in overhead costs and $218,000 In direct labor costs. Compute the amount of under- or overapplied overhead for the year. A) $11600 overapplied.
B) $18,400 overapplied.
C) $11,600 underapplied
D) $18,400 underapplied.
E) $4.200 underapplied.

The correct answer is C.

Explanation:

Giving the following information:

Estimated:

Overhead= $363,800

Direct labor= $214,000

Actual:

$382,200 in overhead costs

$218,000 direct labor costs

First, we need to calculate the predetermined overhead rate:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 363,800/214,000

Predetermined manufacturing overhead rate= $1.7 per direct labor dollar

Now, we can allocate overhead based on actual direct labor costs:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Allocated MOH= 1.7*218,000

Allocated MOH= $370,600

Finally, we can determine the under/over allocation:

Under/over applied overhead= real overhead - allocated overhead

Under/over applied overhead= 382,200 - 370,600

Under/over applied overhead= $11,600 underallocated